Digital Lending

Pune-based Early Salary offers a one-month bridge loan if you are broke at the end of the month. Bengaluru-based ZestMoney lends you money to buy consumer durables products on e-commerce portals on equated monthly instalments, or EMIs, without credit card. KredX, another start-up, has an online discounting platform for entrepreneurs where they can raise money by handing over their unpaid invoices. And Bankbazaar is an online marketplace - the way Amazon is for mobile phones and consumer goods - where one can shop for the best deals on home, car and other retail loans.

These players represent a new trend where fintech players, after flooding transactions/mobile wallet segments, have started making inroads into the organised lending business too, thanks partly to banks not doing enough to innovate and reach out to small ticket size and underserved markets. But will they be able to scale up and challenge banks, or grow by joining hands with banks and sticking to their niche areas?

Nuts & Bolts

One common thread among lending fintech players is the heavy use of technology. Most of them are also using new social media tools and data analytics to assess borrowers' creditworthiness. The target borrowers are usually youngsters who have just entered the job market or new small entrepreneurs.

There are four sets of start-ups in fintech lending - a marketplace model such as Bankbazaar that offers a range of choices to borrowers while the lending is done by banking/NBFC partners; players like ZestMoney that have an innovative product for an underserved segment but lending is done by banks/NBFCs; companies like Early Salary that are lending from own books; and peer-to-peer, or P2P, lenders, who neither use own money nor have tie-ups with banks. P2P players such as Faircent, LenDenClub and Lendbox pool savings of high net worth individuals to lend further. This means not all fintech players are challenging banks. Some are, in fact, working with banks/NBFCs, while others are serving segments hitherto ignored by traditional banks and NBFCs. The opportunities, say these fintech players, are huge.

Small Business Loans

The micro and small enterprises (MSE) segment is hugely underserved by banks. The outstanding bank credit to MSEs is just Rs 3.50 lakh crore out of the total lending of `70 lakh crore. This comes to just 5 per cent. Banks usually stay away from the sector due to low promoter equity, absence of collateral and high default rate. New banks, such as Bandhan Bank, which has its origin in microfinance, and small finance banks are also beginning to make a mark in micro and small loan segments. Microfinance institutions, too, have been doing their bit. Now, in a perfect example of more the merrier, fintech players have added weight to these efforts to take credit services to every nook and corner of the country. But will the new players be manage the risks inherent in such lending?

Akshay Mehrotra, Co-founder and CEO, Early Salary

Lizzie Chapman, Co-founder and CEO, ZestMoney

Fintech players say there is not much difference between lending to an individual or an MSE owner as both have limited collateral, low incomes and smaller loan requirement. Gurgaon-based Indifi Technologies, supported by investors such as Omidyar Network and Accel Partners, has found niches within the MSE segment. "We take a segment-specific view of MSEs. Different sectors have different nuances," says Alok Mittal, CEO, Indifi Technologies, which is focusing on travel, hospitality, e-commerce and trading. Mittal, who had earlier co-founded JobsAhead, later acquired by Monster.com, says these sectors are underserved by banks. Some banks have, in fact, blacklisted the travel sector. However, Indifi doesn't lend from its book. Instead, it has a tie-up with over half-a-dozen financial institutions, which include banks such as RBL Bank and IDFC Bank. Experts say it's a win-win for both as traditional financial institutions have neither invested much in technology for giving small loans nor acquired expertise in sectors that are highly unorganised.

Many P2P lenders are also exploring the small business loan segment. "We evaluate borrowers on 50-plus parameters," says Raghavendra Pratap Singh, the co-founder of i2ifunding, a P2P start-up. Traditional banks go by income tax returns, credit bureau score and the duration for which the business has been functional. "Banks don't entertain new entrepreneurs," says a fintech entrepreneur. The MSE segment fits in well with the strategy of fintech players.

Individual Loan Innovation

The fintech players are creating a niche for themselves among retail borrowers by creating new segments. Pune-based LoanTap offers rental security deposit loan. Early Salary offers a one-month loan to people who spend their salary before the end of the month. ZestMoney offers ready loans on e-commerce purchases. The companies are either collaborating with banks and NBFCs or lending from their own book. "We are not just a platform. We own the money as an NBFC. We take the risk," says Akshay Mehrotra, CEO at Early Salary. ZestMoney works on a collaborative model. "We are at the front end. We can package all the valuable data for banks and financial institutions that they can use to make judgment. Banks, with low cost of funds, are best at compliance and balance sheet management," says Lizzie Chapman, CEO, ZestMoney.

There are also over half-a-dozen players such as Apnapaisa, deal4loans and Bankbaazar that work on the marketplace model. These help people compare products of different banks and NBFCs. In the last quarter of 2016/17, close to 44 million visitors visited the Bankbazaar website to search for financial products. "This is not limited to certain cities. This covers the whole of India," says Navin Chandani, Chief Business Development Officer, Bankbazaar.

Not A Bank

Unlike in other markets, fintech players in India are not saying that they want to become banks. The segment, they say, is niche enough to give a competition to traditional banks. "These niches are important in early stages to hold on to customers. Once we attract them, the challenge is offering better services and catering to their larger requirements. That is important for the future," says Mehrotra of Early Salary.

As fintech players build customer data over a period, there is a possibility of cross-selling other products. "We will be led by customers. We will study their life cycle and understand them as they grow with us," says Chapman of ZestMoney.

Globally, there are cases of a single product company making it big. For example, Capital One of the US started with a credit card business built on data analytics. In the UK, Money Super Market has created a business by becoming a marketplace model to sell loans.

The Challenges

The biggest USP of fintech players is their assessment of customers' creditworthiness. Unlike banks, which rely only on credit bureau scores and income statements, they collect a lot of data through social media and other sources. They even bet on young customers whose credit history is insignificant. "We believe that young people are credit-scorable. We can use digital methods tried and tested all over the world to give a score to these people," says Chapman of ZestMoney. They say the young customers are aware of credit bureaus and negative implications of loan defaults. "We run an algorithm which combines all non-credit-scorable data into a numeric score. It can churn a lot of data," says Akshay Mehrotra of Early Salary.

While the companies refuse to reveal more about their credit appraisal processes, the fact is that customers behave very differently when they are under financial stress. The Indian consumer market, for instance, saw huge defaults even in small personal loans after the 2008 financial crisis.

Another worry is banks outsourcing credit appraisal to fintech players in cases where the two are working together. The Reserve Bank of India has in the past warned banks that they should not outsource credit appraisal processes to third parties. "We are yet to see a one full business cycle of boom and downturn. The real picture will be clear after six-seven years," says a consultant. There is also the challenge of recovery of loans where the companies are lending from their own book as fintech players do not have enough resources in this area. The court-driven recovery process is both expensive and time consuming.

Apart from all this, the banks are learning fast from these players. "That's what they should do," grins Chapman of ZestMoney. The traditional banks have the advantage of huge customer data base, long relationships with customers, variety of products and trusted brand. "They can easily replicate some fintech innovations. Banks will certainly catch up in the next three-seven years," says a former CEO of a bank. "The pressure is on us to be ahead of the curve," says Mittal of Indifi Technologies.

These new businesses will have to scale up to a respectable size to make a mark in the cutthroat financial services business.